Now not time to end economic stimulus: OECD

By IBT Staff Reporter On 09/03/09 AT 4:20 PM

G20 countries need to pre-plan for withdrawal of the monetary and fiscal stimulus that is fuelling global economic recovery but should not move on either front for much of the next year, the OECD's chief economist says.

I think we need to have the rather massive policy stimulus for some time to come, Jorgen Elmeskow told Reuters in an interview.

If you switch it off from one day to the other, it's not clear that the economy would be resistant enough to withstand that.

The Organization for Economic Co-operation and Development published improved forecasts for key industrialized economies on Thursday that signal the end of global recession by as early as the third quarter.

Elmeskov said in a statement accompanying the forecasts that the global recovery appeared to be coming earlier than envisaged just a few months ago, and he told Reuters it might even prove stronger than many had been predicting.

But the first moves away from ultra-low official interest rates should wait until well into 2010 and in some cases even beyond the statement said.

Likewise, the fiscal stimulus that has already been announced should continue to be deployed, even if the potential need for additional commitments was receding, he said.

Elmeskov declined to be drawn on when exactly the European Central Bank, U.S. Federal Reserve and other central banks should move and emphasized the need to come up with flexible exit strategies for when the time came to withdraw stimulus.

Against the background of what looks like a slightly better economic outlook ... and also better financial conditions which suggest growth could be a little stronger in 2010, that would advance the time at which central banks would need to move, but we're not talking about any time soon, Elmeskov said.

We have to recognize things are still quite uncertain, he said.

Bond markets had shown considerable confidence in governments so far, Elmeskov said, but that would not last forever unless there were credible plans for how to get out of big red numbers on budgets right now.

Asked about rate rises by central banks as part of the exit strategy, Elmeskov said if recovery took a firmer hold in the months ahead the question might rise of a move in 2010 or shortly after.

But we'd see the first moves really coming (only) well into 2010, he said.

Asked about the ECB specifically, Elmeskov said:

What we're saying for the moment is we don't see that, the first move (from the ECB) for some time to come. What we're saying is that the ECB, as it obviously would do in any case, let its actions be influenced by economic developments.

A white Fiat van rammed into pedestrians outside enjoying a late afternoon stroll on Las Ramblas in Barcelona on Thursday killing at least 13 people and leaving hundreds injured. The Islamic State group claimed responsibility for the attack.